There are few businesses in the world more iconic than The Walt Disney Company (DIS 0.16%). With its vast library of intellectual property and its theme parks around the globe, Disney has a brand that's hard to beat. Prior to 2020, the stock market was a Disney fan as well. From 2010 to 2019, Disney stock outperformed the S&P 500 by almost 160%.

The story since the start of the pandemic has been less Disney fairy tale and more nightmare. From the start of 2020 through today, Disney stock is down 25% while the S&P 500 has gained 31%. This change in fortunes makes sense considering the effect of the pandemic on Disney's theme parks and the bear market that pulled down most stock prices.

However, Disney could be poised for a better 2023, making this undervalued stock worth considering for investors.

What's old is new again

The biggest news recently has been the return of Bob Iger as CEO. In November, it was announced that Iger would be returning as CEO, replacing his hand-picked successor, Bob Chapek. While the whole process was messy and drama-filled, there's no denying the difference in the track records of the two leaders.

In his first stint as CEO from 2005 to 2020, Iger made some consequential decisions. The acquisitions of Marvel and Lucasfilm, and the creation of Disney+, were all during Iger's tenure. The timing for Chapek's ascension to the corner office was less than ideal, considering that Disney faced the biggest challenge in its history with the pandemic.

Putting that aside, Iger's previous successes have given some investors hope that his return can help Disney right the ship and get the stock price heading back in the right direction. 

Momentum in the parks

The closure of Disney theme parks and other properties was a massive hit to the business, but this segment has been slowly coming back to life. In 2022's fourth quarter (ended in September), revenue for this segment grew 36% year over year. This was the slowest pace in several quarters, but that's more due to the tough comparison to the prior year. Q4 2021 saw revenue grow 99%.

More importantly for Disney's bottom line is the improving operating income in the parks segment. In Q4, this metric grew 136% on top of triple-digit growth in the year-ago quarter. This ended up being crucial to Disney's net income result of $162 million, which barely crept over into profitability for the quarter.

Streaming success

While the theme park results are important for Disney, the media and entertainment segment represents the bulk of the company's revenue. The headline product in that segment is the Disney+ streaming service. Growth for Disney+ continues to impress. Q4 ended with 164 million Disney+ subscribers, a 39% increase over Q4 2021. As of the end of September, 47% of U.S. households were Disney+ subscribers, trailing only Hulu (another Disney property), Amazon's (NASDAQ: AMZN) Prime Video, and Netflix (NASDAQ: NFLX).

While the growth of the subscriber base remains strong, this segment of the business remains a drag on profitability. Disney has had to spend heavily on content in order to drive its subscriber success. However, during the Q4 earnings call, management stated that Disney's direct-to-consumer (DTC) segment has reached peak operating losses. Operating expenses are expected to decline over the coming quarters and eventually be profitable. This will be helped by a new ad-based subscription tier that was rolled out in December.

I think there's potential for 2023 to be even better than Wall Street thinks. Theme park revenue could see a bump if China continues to reopen as Disney's Shanghai park was shuttered for some time. On the streaming side of the business, if operating expenses can abate, that could be a big benefit to the bottom line.

Disney is trading for 2 times next year's sales, which is a bit of a discount considering its historical price to sales ratio is 2.5. Time will tell how 2023 will turn out, but over the long term I think buying Disney below its historical valuation is a smart move for investors.